Table of Contents
- Combat-Zone Exclusion Guidelines
- Pay that Qualifies for Exclusion
- Tax Liability Forgiveness
- Armed Forces Reservists
- Deferred Payment Options
- Tax-Exempt Thrift Savings Plan Contributions
- Tax Deadline Extension for Deployed Military Members
- Make the Most of Deployment Tax Benefits
Deployment to a combat zone is mentally, physically and emotionally taxing on both service members and their families. The last thing they need to be taxed on is income earned while fighting for our country. Serving in a combat zone is hard enough without worrying about taxes. Luckily, there are tax benefits available only to active-duty members of the armed forces.
The following tax benefits and exclusions are available only to members of the armed forces and help to ease the financial burdens deployments place on service members and their families.
Combat-Zone Exclusion Guidelines
You are entitled to certain tax benefits if you are currently serving in the U.S. Armed Forces in a combat zone or a location certified for combat-zone tax benefits due to its direct support of military operations.Any member of the armed forces, who works in an area that qualifies as a combat zone can exclude certain pay from their earned income at tax time. According to the Armed Forces Tax Guide, you are eligible for this tax exclusion if you work in one of the following conditions:
- In a combat zone as designated by the president in an executive order
- A qualified hazardous duty area designated by Congress while receiving hostile fire pay or imminent danger pay in accordance with 37 USC 310
- An area outside the combat zone or qualified hazardous duty area when the U.S. Department of Defense certifies that such service is in direct support of military operations in a combat zone or qualified hazardous duty area, and you receive hostile fire pay or imminent danger pay
Pay that Qualifies for Exclusion
Enlisted members of the armed forces, warrant officers and commissioned warrant officers can exclude the following pay from their earned income:
- Active-duty pay earned in any month you serve in a combat zone
- Imminent danger pay and hostile fire pay
- Re-enlistment bonus pay if the voluntary extension or re-enlistment occurs in a month served in a combat zone (future bonus installments will also be tax free if the extensions were signed in the combat zone)
- Pay for accumulated leave days earned in any month served in a combat zone
- Pay received for duties as a member of the armed forces in any nonappropriated fund activities
- Awards for suggestions, inventions or scientific achievements you are entitled to because of a submission you made in a month you served in a combat zone
- Student loan repayments made during deployment to a combat zone
Service members are entitled to a complete pay exclusion for the entire month if they serve in a combat zone for any part of one or more days during a particular month.
Any member of the armed forces who becomes a prisoner of war or is missing in action as a direct result of serving in a combat zone will continue to earn tax-excluded income for the duration of their status as a POW or MIA member of the armed forces.
Service members can exclude military pay if they are hospitalized as a result of being injured or falling sick while serving in a combat zone. Commissioned officers may only exclude the highest rate of enlisted pay plus any imminent danger or hostile fire pay received while in a combat zone.
Tax Liability Forgiveness
Any tax liability from a member of the armed forces will be forgiven or refunded if that service member dies while in a combat zone. Taxes due during the year of their death, and sometimes for earlier years as well, will be forgiven.
Armed Forces Reservists
If you serve as a member of the armed forces Reserve and your duties as a Reservist require you to travel more than 100 miles from home, you can deduct your unreimbursed travel expenses as an adjustment to income on line 24 on your IRS 1040 form.
As a Reservist, you can include any unreimbursed expenses that occur from the moment you leave home to fulfill your duty to the moment you return home. The total deduction allowed for reservists is limited by the per diem and car allowances in Chapter 6 of Publication 463 on the IRS website.
It’s important to note that even though you don’t have to include combat pay as earned income on your tax forms when dealing with individual retirement accounts, you do have to include your combat pay in your total gross income. Your gross income decides your contribution and deduction limits for any IRA accounts, regardless of combat status.
IRA Tax Benefits for Active-Duty Reservists
The IRS gives a lot more flexibility with IRA accounts to Reservists called to active duty. If you were called to active duty as a Reservist after Sept. 11, 2001, and served for longer than 179 days, any early distribution (money withdrawn) from your IRA account during your time of active duty is immune to the 10% tax usually subjected to early distributions. Certain rules allow Reservists to repay retirement account distributions during the two-year period when active duty ends, even if the repayment contributions exceed annual contribution limits.
Keep in mind, however, that repayments don’t qualify for IRA tax deductions, but your repayments won’t affect other qualifying IRA contributions. Be sure to include any nondeductible IRA contributions on Line 1 of Form 8606, nondeductible IRAs.
Deferred Payment Options
Any members of the armed forces who can prove to the IRS that their inability to pay their income taxes is due to their service in the military can apply to defer tax payments until 180 days after their release from military service. Tax payments made in full by the end of the deferment period won’t be subject to interest.
Tax-Exempt Thrift Savings Plan Contributions
Members who participate in the Thrift Savings Plan have the option of making traditional or Roth contributions to their IRAs. Those who make contributions in the traditional TSP account will have their contributions designated as tax-exempt contributions. This will allow members to make tax-exempt withdrawals in retirement. However, it may be better to use the Roth TSP, due to the way these investments are tracked and managed by the Thrift Savings Plan.
We have a full-length article that discusses this topic here: Understanding Tax Exempt Contributions and Withdrawals to the TSP.
Tax Deadline Extension for Deployed Military Members
Military members who serve(d) overseas in a tax-free zone in the previous or current tax year are eligible to apply for an extension to file and pay their taxes. Most normal tax extensions are only to file, not to pay, so this is a change specifically for military members. The regular tax deadline each year is April 15, and the deadline to file extensions is Oct. 15. (In 2023, the tax deadline is April 18, due to the observance of Emancipation Day, and the deadline for extensions is Oct. 17.)
However, if you receive a deadline extension from a deployment, your deadline will depend on when you deployed and when you returned (typically 180 days after you returned, but this may vary).
The rules on tax extensions due to deployments can vary, depending on when you deployed and for how long. We have all of those details covered in this article: Tax Deadline Extension for Deployed Military Members.
Free tax prep for military: Many military members are eligible for free tax preparation with free tax preparation software or through base programs. Learn how you can file your taxes for free.
Make the Most of Deployment Tax Benefits
Deployments are difficult for everyone involved, but tax benefits help to at least ease the financial burden of being separated from your family for eight months or more. If either you or your loved one has to go on a deployment, make the most of it by seeing it as a great financial opportunity.
If you need more details about which military pay qualifies for tax exclusions, look at the IRS page regarding questions and answers on combat zone tax provisions.
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